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What Currency Looks Most Appealing?

The death of the dollar is among the sort of attention getting features the media favors and for some time between 2008 and today, it seemed that the greenback was to volatile and weak to maintain dominance. Today though, the hype seems overblown as a technically stronger U.S. economy indicates the Fed may not need to endure a third round of bond purchases or quantitative easing.

“The safe-haven function of the dollar is still alive,” according to Achim Walde, the head of global fixed income and currencies at Deutsche Bank AG’s (DB) Cologne, Germany-based Sal. Oppenheim private-wealth manager, in Bloomberg, “The dollar will be strong in 2012.”

The dollar’s strength has perhaps less to do with its own economy than with the global weakness. Japan continues to recover from the massive obstacles resultant of last year’s earthquake, tsunami and nuclear disaster while the Euro is essentially unable to emerge from beneath the pile of rubble created by its towering debt.. These factors, the manipulation of the Chinese currency and the cap on investments in the Swiss Franc, have made the dollar look more like a buy than it has in some time.

This is the perfect storm for the dollar; causing bets on its strength to reach a fever pitch and enter into extreme territory for the first time since March 2010, according to Morgan Stanley (MS). The bank, employing and an aggregate measure including client flow data and market futures positions, determined that currency hit the 85th percentile of the past two years last week among considerable Euro shorting.

The dollar, in spite of swings in volatility, has been rising slowly as global growth grinds to a halt. The reasoning behind this seems largely related not to the dollar's attractiveness in and of itself but its appearance in comparison to other currencies declining in value. Last week alone, this factor led the U.S. dollar to rise 1.9 percent to $1.2717 per euro, making the most significant five day advance since mid-December. Another impetus for the rise has been an increase in the number of talking heads suggesting that the dollar/euro ratio may become one to one again, something that has not happened essentially since the Euro first debuted.

Just recently, Wells Fargo (WFG) voiced its prediction that the euro would continue to decline against the dollar for the third straight year, anticipating the euro to slide to 1.24 in first six months, from $1.33 at the end of 2011, helping bolster the dollar. Quantitative easing across the euro zone will also devalue the currency and increase the appeal of a long stance on the USD.

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